Before You Buy… Is It Great?
by Dr. Steve Sjuggerud
April 3, 2006
I was offered a great deal on some real estate this week…
I know the seller and the property well, and the deal makes good sense just based on rental income alone. The thing is, it’s a nice property, but not a great property…
Warren Buffett became the world’s second richest man by investing. Once, he bought cheap. Now he buys great. It took him many years to figure this out. Here’s how he tells it:
“I guess I had too much inclination originally to buy mediocre, or worse than mediocre, businesses at a very cheap price. That works OK, in the sense that you never lose money; but you never end up with a great business that way either.
So that emphasis has shifted over the years. We don't want to buy the worst furniture store in town at the cheapest price; we want to buy the best one at a fair price.”
Right now, Warren Buffett is sitting on $45 billion in cash. He’s practicing what he preaches. Just because you have cash, doesn’t mean you have to spend it right now.
Buffett wants to buy great assets, at fair prices. And his big cash position tells me he’s not finding fair prices right now…
I think I’ll follow Warren Buffett’s advice in this real estate opportunity… Instead of buying an “acceptable asset at a great price,” I’ll wait on an “extraordinary asset at a fair price.”
It’s actually what we do all the time in True Wealth. In 2001, we loaded up on cheap and great real estate stocks, like Simon Property Group (SPG). (Simon is up three-fold since then… and we took profits around a 100% gain.)
Later, we made big money in things as diverse as mortgage REITs and timberland, all by sticking with the idea of buying great assets at fair prices. Specifically, timberland giant Rayonier is now up about 90% from when I first recommended it in January of 2004.
This lesson is not an easy one to put into practice… it’s much easier to understand a low price than it is to figure a “reasonable” price for a great asset. But this is the way to Buffett-like profits… buy great assets at fair prices.
So the next time you’re sizing up an investment, ask yourself, “Am I buying this because it’s cheap? Or because it’s great?”
If it isn’t an exceptional asset, then wait. That way, you’ll have the cash when it comes along…
Good investing,
Steve
Editor's note: Steve Sjuggerud is a regular contributor to DailyWealth, a free investment newsletter focused on the world's best contrarian opportunities. We write with a simple belief in mind: You don't have to take big risks to make big money with your investments.
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